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A court decision appears to put BC Hydro on the hook for hundreds of millions of dollars in rebates to California consumers.

VANCOUVER -- A long-running, billion-dollar battle between BC Hydro and the state of California has taken a bad turn for British Columbia after a U.S. regulator ruled that Hydro's Powerex subsidiary committed 2,708 trading market infractions that helped inflate the price of electricity during an energy crisis 13 years ago.

An administrative law judge for the U.S. Federal Energy Regulatory Commission (FERC), taken through the "tortuous factual background" and "arduous history" of California's 2000-2001 energy market crisis, has ruled that Powerex and other electricity traders drove up the price of wholesale power by overstating the power demand, or "load", within the B.C.-to-California trading market.

No refund amount was recommended. It's now up to FERC commissioners to decide what action to take on the ruling. More than a dozen companies, including Powerex, made a total of 15,286 false load declarations, the judge found.

By overstating demand on each of those occasions, traders created the impression that an electricity supply shortage was looming — leading to higher prices for each megawatt-hour of power available for sale.

Power is traded freely within the market by utilities including BC Hydro and Washington's Bonneville Power Authority in order to maintain both stable prices and supply for all participants.

However, chaos ensued in California less than two years after the state deregulated its electricity market in 1998, with residents hit by brownouts, rolling blackouts and peak electricity prices that in some cases were 900 times the norm. The state's two largest utilities were driven into bankruptcy and the government was forced to step in to keep buying power.

It was initially believed that the problems in California arose from a lack of forethought into the structure of the deregulated market. But that changed in 2002 when documents made public after the bankruptcy of Houston-based energy trader Enron revealed an array of schemes to "game" the California market.

One of those documents, a hand-written note by an Enron trader, described Powerex as "hogs at trough."

Powerex's trading profits in the 2000-2001 period exceeded $1 billion, compared to about $150 million in the fiscal year just ended. Ujjal Dosanjh, who was NDP premier during the bonanza, announced in February 2001 that Hydro customers would get a $200 credit on their electricity bills.

A subsequent investigation by The Vancouver Sun found that California state regulators had taken note of unusual power trading tactics by Powerex just days before the power supply crisis commenced in 2000.

After the Enron revelations, California took action to recover at least $7 billion from Powerex and 60 other traders. The majority of traders have reached settlements, but Powerex is one of 16 maintaining their innocence.

This month's judgment pertains to one of two active cases against Powerex, the first involving alleged violations in summer 2000.

BC Hydro will only disclose that it may be compelled to forfeit a claim to $265 million for power sold to two California power system operators but never paid for — saying any further disclosure could cause a "potentially adverse effect" on the outcome of the dispute.

FERC documents show that another amount, described as a "refund claim", running between $779 million and $942 million, is the subject of a case that commences on April 15, and involves alleged market violations between October 2000 and June 2001.

Powerex maintains that the cases are politically motivated in order to divert attention from the state's bungled market reforms. Regulations unfettered the wholesale market but froze consumer prices — so that there was no inducement to consumers to cut back electricity consumption when prices jumped.

This week, the California Public Utilities Commission issued a news release heralding the decision, saying it "finally vindicates California's legal claims on behalf of ratepayers."

It is asking for $1 billion in refunds and $600 million in accumulated interest from more than a dozen trades, but that could still take a while. FERC's commissioners must first approve the ruling, and that can't happen until they give the traders an opportunity to re-argue their case. Even after FERC issues a final order, the case could still end up in front of the U.S. 9th Circuit Court of Appeals.

It will probably take another five years for both cases against Powerex to be resolved.

Hydro's response was a prepared statement from Powerex chief legal officer John Irving.

"Since the California energy crisis ended in 2001, U.S. regulators have consistently ruled in Powerex's favour after very thorough hearings and investigations," Irving stated.

"These rulings clearly reinforce our position that Powerex has always acted lawfully while working hard to ensure Californians received the electricity they needed during their extraordinary energy crisis."

Irving added that Powerex intends to appeal the ruling.

B.C. Energy Minister Rich Coleman echoed the comments, saying the case is likely to be held up in court for several more years, and that he is confident Powerex did nothing wrong.

"We believe we didn't operate in any way that was fraudulent or problematic," he said. Coleman added that the government has set aside enough money to cover any potential payout, although he hopes the money will not be needed.

"The big question is can we get to the point where we don't have to have what we set aside and get it back," he said.

New Democratic Party energy critic John Horgan also supported Powerex, adding he believes there was nothing wrong with the activities in question, which happened while an NDP government was in power.

"California deregulated their energy market, found they had no energy, and the people of British Columbia provided that energy at the cost that the market was prepared to pay at that time. It was unfortunate for them. It was fortunate for us," he said.

"Whether it be with softwood lumber or energy, whenever our American trading partners don't like what we're doing they go to court."

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